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The (mostly illegal) bitcoin economy is vastly inflated through price fixing

photo of Michel Bauwens

Michel Bauwens
14th September 2013


1.

“I’m concerned over the irony of the net generation, which has spawned a number of anti-Wall-Street movements and sentiments, to see people in this generation intuitively picking up trading practices that carry on every bit of foul legacy that offline traders have practiced before the net generation. It seems the more things change, the more they stay the same.”

2.

“This is coordinated with the selling person. Those buy orders keep replenishing as the sales orders keep ticking one bitcoin per five seconds; they are coordinated. This is one person in the Shark Squad selling to another person in the Shark Squad, to give the illusion of market downward pressure and sell volume. Both of these activities – splitting an order to give the illusion of many trades, and trading within a group to give the appearance of increased volume and a certain market direction – are considered painting the tape and highly illegal”

Rick Falkvinge‘s article goes into the details of the price fixing scheme that inflates the value of Bitcoin (which objectively should be around $4 in his estimation).

In our excerpt we focus on the 2nd aspect of the article, showing the overall majority of bitcoins are used in the illegal economy:

Excerpts:

“We look at the different economies making up bitcoin today. There are about 11.7 million bitcoin in circulation today. Out of these, a staggering 2 million bitcoin are gambled every year on the SatoshiDice site alone, and another, PrimeDice, 1.5 million.

To put these numbers in perspective, if translated to the global economy, it would mean that people bet the entire production of the USA at one single betting site, and the entire production of Europe on another. But as we have seen, these numbers do not contribute to the money supply pool in any meaningful way in a functioning economy. They are not funds in lockdown, or at least not for more than a few minutes. For all intents and purposes, the velocity of internet-based gambling money is infinite, or at least so much larger than other funds that it can be discarded.

That leaves us with drugs, read Silk Road, and for lack of a better word, normal products and services. A recent estimate says that Silk Road has two million USD in monthly turnover. This is real money that contributes to the money supply. A fair estimate could assume a two-month lockdown on such funds.

What about normal products and services? To get a ballpark understanding, I contacted Automattic (the parent company of WordPress) and asked politely if they could share how much revenue they have received in bitcoin, being one of the highest-visibility brands ever to accept bitcoin. The answer came quickly – “a couple of hundred dollars worth, so far”. If the highest-visibility brand accepting bitcoin has had less than two bitcoin in revenue in total, then for all intents and purposes, there is currently no measurable bitcoin economy outside of drugs and gambling.

This gives us enough data to calculate the value of the money pool, and derive the value of one bitcoin from there. If Silk Road has 22 million USD in annual sales, let’s be very generous to err on the safe side, and divide that by the United States’ money velocity, which is 1.67 on average instead of the 6 estimated above.
This generous estimation gives us a total bitcoin money supply value of 13 million USD.

The observant will note that this estimation of bitcoin’s total money supply value, while obviously a ballpark number, is less than two magnitudes smaller than the bitcoin money supply’s current valuation of 142 USD x 11.7M bitcoin = 1.66 billion USD.

Dividing this value with the bitcoin supply to get the current value of one bitcoin, this means that the current value of one bitcoin, as backed by exchange of products and services in its role as a transactional currency, is roughly one US dollar and twelve US cents. And that’s still a generous estimate.

It’s not hard to see why I use the words “vast overvaluation”, seeing how one bitcoin is currently trading at 142 USD. So how did we get here? Part speculation on future value, obviously, but there is something else going on too here. More interestingly, when looking very closely at the market for the past two months, there is ample and obvious evidence of price fixing.”

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One Response to “The (mostly illegal) bitcoin economy is vastly inflated through price fixing”

  1. @mikeriddell62 Says:

    Excellent article, thanks.

    Bitcoin isn’t over-valued just because it provides liquidty to drug-pushers, money-launderers and people traffickers, it’s over-valued because it’s ‘purpose’ doesn’t chime with the vast majority of market-players whose moral and ethical standards value different things.

    However, Bitcoin should be given credit for what it has achieved. It has paved the way for a new generation of ‘money’, and for that it should be congratulated. Maybe that was it’s purpose in the first place?

    Either way, community currencies/alternative currencies/complementary currencies are here to stay. An army of ethical currency developers are putting their own money, blood, sweat and tears into developing their own versions of Bitcoin to make the world a better place.

    Making a difference is what counts these days. And making a difference that can be measured is for me, the only game in town. Everything else is more of the same and that’s something we don’t want no matter who we are or where we’re from.

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